In amongst the stocks that deserve to be cheap, I often find a handful of shares that are unloved but good businesses. Potential bargains.

My latest trawl through the FTSE 250 mid-cap index has unearthed three dividend stocks I think offer good value for buyers at current levels.

A turnaround buy?

Medical technology company ConvaTec Group (LSE: CTEC) has been a disappointing performer since its 2016 flotation. Like many such firms, it floated at a demanding valuation that became unsustainable when growth rates disappointed.

Despite this, I think it’s fundamentally an attractive business. ConvaTec makes a range of medical products used in areas such as wound care, ostomy, incontinence and infusion. Many of the firm’s products are disposable or consumable, making them repeat buys for patients and hospitals.

A trading statement on Friday confirmed that growth remains challenging. Sales fell by 2% to $430.6m during the first quarter. However, full-year expectations are unchanged and ConvaTec expects to generate an adjusted operating profit margin of 18%-20% this year — a solid result.

The shares now trade on 12 times forecast earnings and offer a 3.5% dividend yield. With earnings backed by strong cash flows, I think ConvaTec offers decent value at this level.

Retail isn’t dead

Retailers with big high street chains are out of favour at the moment. But in my view there are likely to be some long-term winners in this sector.

One retailer I own myself is Dixons Carphone (LSE: DC). This firm is the UK’s largest retailer of home electricals, computers and mobile phones. It also has significant market share in Scandinavia and Greece.

Sales were steady over the peak Christmas period, and newish chief executive Alex Baldock is working hard to expand online and build a larger customer credit business — a key area of growth.

Consumer demand for the latest gear is still strong and Dixons Carphone’s scale means it can price competitively. In my view, sales are unlikely to collapse unless unemployment or interest rates rise. As far as I can see, there’s no sign of either at the moment.

With the stock trading on seven times forecast earnings and offering a 5.2% dividend yield, I rate this retailer as a buy.

This wheeler-dealer offers a 6% yield

City firm TP ICAP (LSE: TCAP) isn’t exactly a household name. But it is the world’s largest interdealer broker. What this means is that its teams of dealers act as middlemen, negotiating financial deals between clients such as investment banks and oil traders.

The rise of electronic trading has put pressure on this business model, which is changing to include more technology and data services. But TP ICAP’s scale and expansion into the oil market have helped the firm to adapt. Although market conditions can affect the group’s profits, this £1.6bn City firm ended last year with net cash of more than £600m.

The shares have halved in value since the start of 2018 and now trade on 9 times forecast earnings, with a 6% dividend yield. I think this is probably too cheap and would rate the shares as a buy.

The post 3 top FTSE 250 value stocks I’d buy today appeared first on The Twelfth Magpie.

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Roland Head owns shares of Dixons Carphone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The pace of annual dividend growth has been pedestrian and it’s forecast to slow down. Between 2018 and 2019, City analysts following the firm expect the dividend to grow just 0.7%. With any firm, I tend to view the directors’ decisions regarding the dividend as a good test of what they think about trading and the underlying prospects of their business. To me, HSBC’s dividend growth outlook says “caution!”

There may be trouble ahead

And there are good reasons to be cautious. Although revenue and earnings are likely to creep up over the next couple of years, the stock market has been discounting the firm’s progress on earnings by dialling down the valuation. The process of valuation-reduction has been going on for a few years and it reflects in HSBC’s share-price chart. Apart from jumping up and down, the share price has made zero progress upwards since the beginning of the century.

I think the market is capping the share price because HSBC is a cyclical business. Earnings typically wax and wane along with the ups and downs in the wider macroeconomic environment. I think the market is viewing decent earnings at HSBC now as a step closer to the peak in its earnings for the current cycle. The risk, of course, is that earnings could plunge at some point, which could take the share price and the dividend down too. That’s why I think it is better to view HSBC as a cyclical investment first and a dividend opportunity secondly. There are risks in holding the stock and to me, it’s not worth the worry. I think the stock is a value trap.

Progress in mixed market conditions

Instead, I’d consider other firms in the wider financial sector such as UK-based interdealer broker TP ICAP (LSE: TCAP). The company updated the market today on trading for the four months to 31 October. Constant currency revenue rose 1% compared to the equivalent period last year and it’s up 3% so far this year.

Chief executive Nicolas Breteau said in the report that the firm is “well placed” to grow in mixed market conditions, “characterised by periodic volatility that we saw in October following the US Federal Reserve’s rates decision.”  He explained that the directors have a “firmly-held belief” that investing in growth areas such as Data & Analytics will benefit the firm over the longer term as it develops “solid and scalable” revenues in its worldwide businesses.  

The company also announced the acquisition of Axiom Commodity Group, an energy and commodities broker based in the US, which underlines the firm’s ongoing focus on growth. I’d rather take my chances with TP ICAP than to bet on an out-and-out cyclical firm such as HSBC.

The post Why HSBC could be a value trap and what I’d buy instead appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

First up is FTSE 100 stalwart Legal & General Group (LSE: LGEN). This stock is a popular choice with income investors and pension funds. So for many shareholders, today’s news from the firm may be bittersweet.

The good news is the company will book an exceptional profit of £300m-£400m this year. The bad news is that this is possible because the firm’s life insurance customers aren’t living as long as expected. So Legal & General is able to release some cash previously reserved for claims.

Moving on, the rest of the firm’s results are good, if not outstanding. Operating profit rose by 5% to £909m, but after-tax profit fell by 19% to £772m. That company says that this was due to a reduction in the value of some of its investment assets, due to volatile market conditions.

Sleep soundly with these shares

The firm’s return on equity — a key measure of profitability for financial stocks — fell to 20.3% during the first half, compared to 26.7% during the same period last year. But this is still a very impressive figure. Most of the big FTSE 100 banks have a return on equity of less than 10% at the moment.

This high level of profitability is one of the reasons why I continue to rate Legal & General as an income buy. The shares currently trade on 9.5 times 2018 forecast earnings, with a 6.2% dividend yield. At this level I believe they’re a safe long-term buy for any income portfolio.

A contrarian opportunity

Legal & General shares have lagged the FTSE 100 slightly so far this year. But I don’t see the insurance giant as a contrarian buy.

If you’re looking for a stock that’s truly out of favour, one option is FTSE 250 interdealer broker TP ICAP (LSE: TCAP). The share price of this voice broking specialist has fallen by 46% since March, thanks to disappointing results and a July profit warning.

This business was formed when Tullett Prebon merged with the broking division of ICAP in late 2016. But the integration of the two businesses is proving harder than expected. Former chief executive John Phizackerley was given the boot in July. His replacement Nicolas Breteau admitted this week that the integration plan “had so far failed to achieve what had been envisaged”.

Time to start buying?

TP ICAP’s revenue fell by 2% to £910m during the first half, but underlying operating profit rose by 7.6% to £155m. This gives a healthy underlying margin of 17%.

Although a number of one-off costs ate into these promising figures, the company is now confident of achieving its revised target of £75m in cost savings by the end of 2019. Investment in new technology-based services is also being ramped up.

The balance sheet remains reassuringly strong, with net cash of £608m at the end of June. There’s no risk of financial distress that I can see. It may also be worth noting that two directors have spent a total of £104,000 buying the firm’s shares this week.

The stock now trades on 8.5 times forecast earnings, with a twice-covered dividend yield of 5.8%. In my view, this could be too cheap to ignore.

The post Legal and General isn’t the only 6% yielder you could buy with £1,000 today appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, the stock could offer turnaround potential in the long run. It appears to have a low valuation, as well as the prospect of improving financial performance in the coming years. Alongside a cheap FTSE 100 stock, it could be worth buying right now.

Difficult period

Although revenue in the six-month period was 3% higher than in the same period of the previous year at constant currency, ongoing cost headwinds are due to hurt its overall performance for the full year. Underlying operating profit for 2018 will be impacted by additional ongoing cost headwinds of around £10m related to Brexit, MIFID II, regulatory and legal costs, as well as IT security.

In addition, changing market conditions are due to increase broker compensation from 50.5% in 2017 to at least 51%. Meanwhile, near-term additional UK regulatory capital requirements and the refinancing of the revolving credit facility are set to increase finance costs to around £35m.

In 2019, further cost increases are now expected. Costs associated with Brexit, regulatory and legal, and IT security are due to rise from £10m in 2018 to £25m in 2019. Investments of around £15m are expected to be made, while finance costs are forecast to rise to £40m.

Investment potential

Clearly, TP ICAP is experiencing a challenging period. The replacement of its CEO has already taken place, with its Chief Commercial Officer taking up the position. In the short term, there could be further volatility ahead for the stock. However, it has a strong position in its markets and the potential for synergies in future following the recent merger. And with the stock now having a price-to-earnings (P/E) ratio of around 8.5, it seems to offer a wide margin of safety.

Recovery potential

Also having a low valuation at the present time is FTSE 100 diversified financial services company Prudential (LSE: PRU). Its shares have disappointed in the last year, underperforming the wider index by around 2%. This means that they now trade on a PE ratio of around 13, which indicates that they may offer significant growth potential.

Looking ahead to next year, the stock is forecast to grow its bottom line by around 10%. This is a stronger growth rate than many of its FTSE 100 peers and indicates that the company’s strategy is working well. Its focus on growing operations across Asia could yield improving financial performance, with the market for financial services products expected to increase rapidly over the long run.

With Prudential having a dividend yield of around 3%, it may lack relative income appeal today. But with growing profitability and dividend cover of three times, it could become a strong income share over the medium term.

The post Why now could be the time to buy into the TP ICAP share price after 33% decline appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Prudential. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, Aviva (LSE: AV) is one stock that seems to offer a good mix of growth potential and a low valuation. But it’s not the only company that could be worth buying for retirement. Reporting on Tuesday was another stock that could be worth a closer look.

Strong maiden results

The company in question is diversified financial services business TP ICAP (LSE TCAP). It released its first set of full-year results following major changes to its structure. Its integration process is progressing well, as synergy savings were accelerated from 2018 into 2017. It therefore achieved £27m of synergy savings in 2017, which is ahead of its £10m target.

The next phase of its integration will focus on delivering its IT plan, with the overall synergy saving target of £100m by 2020 remaining in place. The business has been able to overcome regulatory change, while so far in 2018 it has reported an encouraging start to the year.

Looking ahead, TP ICAP is expected to report a rise in its bottom line of 21% in the current year, followed by further growth of 17% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which suggests that it could deliver impressive returns. And while there are ongoing changes at the company following recent acquisitions, the overall trajectory of its share price could be upwards over the medium term.

Changing business

Of course, Aviva also experienced a period of major change in recent years. It made a number of asset disposals and acquisitions, with it becoming a more efficient entity as a result. The company has been able to generate improving profitability in recent years, and this trend is showing little sign of changing in the near future.

For example, over the next two years Aviva is expected to report a rise in its bottom line of 61% in the current year, followed by further growth of 8% next year. Despite such a positive outlook for the company, it has a price-to-earnings (P/E) ratio of just 9. This suggests that it is undervalued at the present time and may offer growth at a reasonable price. That’s especially the case since it has strong capital generation which may be used to invest in future growth opportunities.

With Aviva having a dividend yield of 5.6% from a payout which is covered almost twice by profit, it appears to be a strong income stock. As such, its mix of capital growth potential and a high income return could lead to a strong performance in the long run.

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Peter Stephens owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The group said that although revenue during the three months to 30 September rose by 3% to £420m, “the outlook for the fourth quarter revenue remains challenging”. The company generally sees higher levels of activity among its clients when markets are more volatile than they are at present.

That makes last year’s fourth quarter — which included the election of US President Trump — a tough comparison for this year.

Another unexpected piece of news is that CFO Andrew Baddeley, is stepping down from the board “with immediate effect”. No explanation is given for this sudden decision, but Mr Baddeley has agreed to stay on to help with the transition.

For me, the underlying message behind Friday’s trading update is that the outlook is uncertain. Although today’s revenue figures were in line with City forecasts, the tone of the statement didn’t seem very positive.

Buy or sell?

In fairness, the group has delivered a solid performance so far this year. TP ICAP shares have risen by 22% since 30 December, when the merger between Tullett Prebon and ICAP’s brokerage unit was completed. The stock is now trading at post-2008 highs, but I’m not sure the current outlook justifies such as strong valuation.

At 505p, the stock trades on a 2017 forecast P/E of 15 with a prospective yield of 3.3%. Although performance is expected to improve next year, this valuation doesn’t seem compelling to me. I’d be tempted to take some profits.

I’m warming to this 7% yield

Utility group Centrica (LSE: CNA) has fallen firmly out of favour with the market this year. The group’s stock has lost 28% of its value so far in 2017. Only three of the 20 brokers who cover the stock have a ‘buy’ recommendation on it.

But all is not necessarily lost. Work is ongoing to position the business for the future. One example of this is today’s news that the firm has acquired REstore NV, a company which helps a number of large European industrial businesses manage their power requirements cost-effectively.

UK investors should also remember that in addition to British Gas, Centrica has a US utility business and an oil and gas production unit, which could benefit from the recent rise in oil prices.

Buy or sell?

Centrica’s adjusted earnings per share are forecast to fall by 10% to 15.2p this year, but this is expected to be a low point. Analysts have pencilled in a 5% increase in earnings per share for 2018, putting the stock on a modest forecast P/E of 10.4.

The group’s dividend is also expected to remain safe. Cash generation has been good over the last couple of years and net debt has fallen from a peak of £6.5bn to about £3.8bn. A dividend of 12.2p per share is forecast for this year, giving a chunky prospective yield of 7.3%.

Although this situation does carry some risk, I may top up my personal holding over the next few weeks.

The post One dividend dud I’d sell to buy Centrica plc appeared first on The Twelfth Magpie.

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Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The fact that the company is still an integral part of the financial system is clear in its very sold H1 results. In the period to June, the company’s pro forma revenues, which include the recently acquired voice broking division of NEX Group, rose 12% year-on-year (y/y) to £925m as demand for its voice broking and electronic trading services increased.

As the company digests this acquisition and cuts redundant costs such as overlapping IT systems, underlying operating margins bumped up from 14.1% to 15.6% y/y and underlying operating profit increased 23% to £144m. Results were less flattering on a statutory basis, but these underlying results give a better view of the health of the business by stripping away acquisition-related costs.

Looking forward, there is no doubt that voice broking is a business under threat. Management is well aware of this and has been investing heavily in building out its electronic services to co-exist alongside human brokers who still provide clients with in-depth knowledge about market conditions that no computer is able to provide.

By emphasising the benefits of accessing both state of the art electronic data as well as the human connection, TP ICAP is growing nicely by taking market share from smaller competitors, building out its capabilities in the energy business and sweeping up smaller institutional traders that big banks have cut to focus on a handful of huge clients.

TP ICAP may seem a bit of a throwback, especially compared to the solely tech-focused NEX Group. But with solid growth potential, a highly cash generative business model, a 3.4% dividend yield and attractive valuation of 15 times forward earnings, I see plenty to like about it.

The end of the line?

Another company swept up in recent merger talk is industrial workwear rental and laundry provider Berendsen (LSE: BRSN). After initially rejecting a series of bids from French competitor Elis earlier this year, the board finally recommended a takeover offer in June that consists of £5.40 and 0.403 Elis shares per Berendsen share that at the time held a combined value of £12.61.

The company’s shareholder will have their say on whether to accept the offer at the general meeting later this month, but if all goes to plan, Berendsen will be de-listed in early September. And while many large mergers go astray, there appears to be significant logic behind combining these two businesses.

The combined group will offer its services across most major European countries and will improve its pricing power, lead to some cost savings and give it a better platform to pursue smaller bolt-on acquisitions. Current shareholders will have to decide for themselves whether to sell their shares now and pocket a hefty premium or to stick with Elis, but either way, this takeover offer has been a boon to Berendsen’s struggling share price.

The post An underrated growth and income star trading at a great valuation appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

TP’s acquisition of rival ICAP’s voice broking business completed on 30 December. It’s created the world’s largest voice brokerage business. But this hasn’t been without cost. TP ICAP booked a total of £56.6m in costs relating to the ICAP deal last year, pushing the group’s reported operating profit down to £73.3m.

Although underlying profit is expected to rise from £103m to £216m in 2017, dilution from the issue of new shares to ICAP shareholders means that earnings per share are expected to remain fairly flat.

In fact, broker forecasts currently suggest that TP ICAP’s underlying earnings could fall to 36.7p in 2017, from 42.5p per share in 2016. This puts the stock on a forecast P/E of 13, with a prospective dividend yield of 3.5%.

For income investors who bought at a lower price, the shares are probably worth holding. The problem — as always — is that earnings and activity levels are heavily dependent on market conditions. The group could easily outperform expectations in 2017, but it might equally underperform. This speculative element means that this is a stock I’d only want to buy when it’s obviously cheap. I’m not sure that’s true at the moment.

21% profit growth

Another firm that benefitted from strong market conditions last year is merchant banking business Close Brothers Group (LSE: CBG).

The group’s operating profit rose by 21% to £131.4m during the six months to 31 January. Earnings per share were 9% higher, at 65.1p, which should mean the group is on track to meet full-year forecasts of 125.2p per share.

Close Brothers reported a net interest margin of 8.2% for the first half of the year and a return on equity of 18%. Both figures are broadly flat compared to the same period last year, but are significantly above what’s available from banks such as Lloyds Banking Group, which reported a net interest margin of 2.7% and an underlying return on equity of 13.2% for 2016.

However, like TP ICAP, Close Brothers’ profitability depends quite heavily on market conditions. Preben Prebensen, Close Brothers’ chief executive, admitted this in his results commentary, saying that “trading conditions have clearly been favourable”.

Another way of looking at the situation is that Close Brothers’ increased profits came from an asset base that was almost unchanged. The group’s loan book rose by just 1.7% to £6.5bn during the first half, while total client assets were 3.2% higher, at £10.2bn.

These growth rates are a long way below the 9% rise in earnings per share and suggest to me that investment gains and fee income were responsible for much of the reported profit growth.

The latest consensus forecasts indicate that analysts expect Close Brother’s earnings growth to slow, with an increase of just 2% pencilled-in for next year.

However, with the stock trading on a P/E of 12 and offering a prospective yield of 4%, I think the risk of a slowdown is balanced by the potential for further gains. I’d hold.

The post Are these FTSE 250 dividend stocks about to go into reverse? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The gains were triggered when the firm — previously known as Tullett Prebon — said that last year’s volatile market conditions mean that 2016 revenue should be 12% higher than the £796m reported in 2015.

My calculations suggest TP ICAP’s 2016 revenue will now be around £891m, which is significantly higher than analysts’ forecasts of £846m.

Big changes underway

Today’s figures from TP ICAP only refer to the old Tullett Prebon business. But the group has recently acquired the broking business of UK rival ICAP (now known as NEX Group). The integration of these two businesses is now moving “swiftly” ahead, and TP ICAP will provide expected performance figures for the combined businesses in March.

In my view, TP ICAP is a good example of a business that’s adapting to changing circumstances, and defying gloomy predictions about its future. The group has addressed the inevitable decline in its voice broking business by expanding into energy trading and acquiring the ICAP broking business.

So far, TP’s major acquisitions have been well timed. Rising interest rate expectations should boost trading in some of the group’s core products, such as interest rate derivatives.

TP ICAP has beaten expectations over the last year, but the shares still look cheap to me. The firm trades on a 2017 forecast P/E of 12.4, with a prospective yield of 4%. I believe further gains are possible, and continue to hold this stock in my own portfolio.

Don’t bet against this bank

Asia-focused bank Standard Chartered (LSE: STAN) has been slow to recover from a prolonged downturn. But there are signs that the group’s performance is starting to improve.

In November, Standard Chartered reported a 5% fall in loan impairments during the third quarter. Underlying pre-tax profit was $458m, compared to a loss of $139m for the same period one year earlier.

Standard Chartered’s Common Equity Tier 1 (CET1) ratio of 13% is at the upper end of its target range. The group’s return on equity — a key measure of profitability — turned positive during the first half of last year, and a full-year profit of $597m is expected for 2016.

Looking ahead at 2017, rising interest rate expectations should help to improve returns. The bank’s profits are expected to rise by 175% to $1,647m this year. Consensus forecasts suggest that adjusted earnings will rise by 135% to $0.50 per share.

The current share price of 688p puts Standard Chartered on a forecast P/E of 17, with a prospective yield of 2.5%. This may seem expensive, but profits remain a long way below historic levels and I believe further increases are likely.

The shares also trade at a discount of more than 30% to their tangible book value. If the bank can continue to reduce its bad debt levels, this discount should gradually shrink.

In my view, a medium-term price target of 900p isn’t unreasonable. I plan to continue holding.

The post Why I’m holding onto TP ICAP plc after today’s update appeared first on The Twelfth Magpie.

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Roland Head owns shares of Standard Chartered and TP ICAP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.